Rising volatility due to weakening in investor sentiment has some people concerned of a potential reversal across the financial markets. It is no secret that risk-averse investors have been spending the past several weeks in search of sectors and asset classes that will protect their capital in the event of a significant pullback. To date, the solution seems to be companies that earn profit from leisure, habits and vices. In the paragraphs below, we'll take a closer look at charts of vice-related assets with a specific focus on alcohol companies since they seem to be outperforming the broader group. (For a quick refresher on this topic, check out: Socially Responsible Investing vs. Sin Stocks.)
Currently, across the U.S. financial markets, it is common for followers of technical analysis to spot long-term trendlines that are being broken to the downside. The bearish crosses suggest that the long-term momentum is shifting in favor of the bears and that the primary uptrend could be in the process of reversing. However, as mentioned above, one group that seems to be countering this trend is the group known as vice stocks. As a group, this segment seems to profit regardless of the state of the economy because people tend to spend money in areas of leisure and vice regardless of the outlook for their financial future.
Taking a look at the chart of the AdvisorShares Vice ETF, you can see that a well-defined ascending triangle pattern has formed over the course of 2018. The recent breakout and subsequent retest of the trendline suggests that the bulls are in control of the momentum and that the price could be headed toward targets north of $28, which is equal to the entry price plus the height of the pattern, in the not-too-distant future. (For further reading, see: The Value of Sin Stocks.)
When it comes to alcohol companies, there are few that control more popular brands than Diageo. The company has been a market leader in the space since its founding in 1886 and holds a market cap of more than $93 billion. Taking a look at the chart below, you can see that the company is trading within an extremely strong uptrend. The recent close beyond the resistance of a defined triangle pattern suggests that the price is headed higher over the coming weeks. Target prices will likely be set near $170, which is equal to the entry price (shown by the blue circle) plus the height of the pattern. (For further reading, see: Investing in Unethical Stocks: The Pros and Cons for Traders.)
When it comes to global beer sales, one of the biggest players is Ambev. Taking a look at the chart below, you can see that the falling price has recently found support near a key trendline, and a bottom appears to be in place. The oversold reading and subsequent rise above the 30 level on the relative strength index (RSI) as shown by the blue circle suggest that traders are expecting the bounce to continue and that there is significant upside potential. (For more on this topic, check out: Top 4 Beer Stocks for 2018.)
The Bottom Line
Vice stocks appear to be the segment that investors are currently increasing exposure to due to increasing volatility across the global markets. The charts above suggest that there is sufficient upside potential for strategic traders should they choose to trade the broad sector or even better risk/reward scenarios in niche areas such alcohol. (For more, see: Build A Model Portfolio With Style Investing.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.